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Required Minimum Distributions (RMDs)

09/27/2018

“The president's plan aims to reduce “regulatory barriers” to MEPs. It also seeks a review of RMDs.”

President Trump signed an executive order, instructing the Labor Department to relax rules on small-business Multiple-Employer Retirement plans (MEPs) and telling the Treasury Department to look at Required Minimum Distributions (RMDs) from 401(k)s and IRAs.

Trump went on to say that this would provide “retirement security to countless American workers and their families. We believe all Americans should be able to retire with the confidence, dignity and economic security that they want.”

Trump explained at the signing that the “complexity of current federal regulations makes it extremely difficult for small businesses to afford retirement savings accounts for their great employees. While large companies can afford to deal with these burdensome regulations, small companies just can’t handle it.”

“This means that 50% of Americans employed at small businesses with fewer than 100 employees, don’t have access to 401(k)s or other retirement plans,” he said.

For this reason, Trump said he’s lowering the costs of retirement plans, so they can become an affordable option for businesses of all sizes. “Small businesses”, Trump said, “will no longer be at a competitive disadvantage and small business workers will now be treated more fairly and have more choices.”

Trump said his executive order decreases the “regulatory barriers,” so small businesses are able to create “low-cost association retirement plans,” also called multiple employer plans, or MEPs. The IRS requires savers to begin taking RMDs, calculated on the basis of life expectancy, at age 70½.

07/31/2018

Based on the amount of your Social Security benefits and other income–including tax-free interest on municipal bonds and certain other excludable amounts–your benefits are included with other taxable income at the rate of 85%, 50%, or zero. The rate depends on how you reduce your tax exposure.

To know if your Social Security benefits will be partially taxed or fully tax-free, you need to use these formulas. Add up your gross income with certain adjustments. This is the amount from line 21 of Form 1040. Then add back any excluded income from interest on U.S. savings bonds used for higher education purposes, employer-provided adoption benefits, foreign earned income or foreign housing and income earned by residents of American Samoa or Puerto Rico.

To see if 50% of your Social Security benefits are taxed, review the amount listed on Form SSA-1099, Social Security Benefit Statement, which is sent to you by the Social Security Administration by the end of January following the year in which benefits were paid. For income tax purposes, the benefits are the gross amount listed in Box 3, not the net amount you actually received after premiums for Medicare were withheld.

All tax-exempt interest is interest from municipal bonds listed on line 8a of Form 1040.

Look at the results compared to a “base amount” fixed for your filing status. If you’re below this amount, then none of your benefits are taxed:

$32,000 if married filing jointly; or

$25,000 if single, head of household, qualifying widow(er) and married filing separately, where spouses lived apart for the entire year.

If the income mix you figured earlier is equal to or above this base amount, then see if 50% or 85% of benefits is includible. For married persons filing jointly, 50% is includible for income between $32,000 and $44,000, and 85% is includible, if income is more than $44,000.

For singles, head of household, qualifying widow(er) and married filing separately, where spouses lived apart for the entire year, 50% is includible of income, if between $25,000 and $34,000, and 85% of benefits is includible, if income is above $34,000. For a married person filing separately who did not live apart from their spouse for the full year, 85% of benefits are includible.

There are also some special situations. The usual computation isn’t used if you:

Made deductible IRA contributions and you or your spouse were covered by a qualified retirement plan through your job or self-employment. (Instead, use the worksheet in IRS Publication 590-A);

Repaid any Social Security benefits during the year (see in IRS Publication 915); or

Received benefits this year for an earlier year (You can make a lump-sum election that will reduce the taxable amount for this year. Use worksheets in IRS Publication 915).

Since 85% of benefits are includible, once you exceed the $44,000/$34,000 income threshold, it may be wise to defer income to a particular year. Say that you know your income is going to be above this threshold and you’re planning on converting a traditional IRA to a Roth IRA. You could make the conversion in this year and pay the taxes on it. This won’t result in any additional inclusion of Social Security benefits. As a result, in the future, you won’t have to take required minimum distributions (RMDs) because you have a Roth IRA, not a traditional one. This will keep your income lower in future years, than it would have been without the conversion.

Remember that your federal income tax isn’t the only tax to worry about. Thirteen states tax Social Security benefits. However, 37 states don’t (either because they have no state income tax or fully exempt Social Security benefits).

Among the 13 states, seven of them (Connecticut, Kansas, Missouri, Nebraska, New Mexico, Rhode Island, and Utah) have high-income thresholds for taxing benefits. So, even if you’re a resident, your benefits may not actually be taxed.

However, if you live in Minnesota, North Dakota, Vermont, or West Virginia—and your benefits are taxable for federal income tax purposes—they’re automatically taxable for state income tax purposes. This is because these states use the federal determination. Remember this, if you’re thinking of relocating in retirement.

Talk with an estate planning attorney, if you have questions about whether your Social Security benefits are taxable and how this may impact your retirement and estate planning.

05/21/2018

“The Roth IRA contribution limit is $5,500. If you are 50 or older, you can save $6,500, including a $1,000 catch-up contribution. Income limits apply.”

The maximum amount you can contribute to a Roth IRA for 2018 remains unchanged from 2017. However, the income limits to qualify for the maximum contribution to a Roth IRA are higher for 2018 than they were last year.

Kiplinger’s recent article on this topic asks “How Much Can You Contribute to a Roth IRA for 2018?” In its answer, the article explains that the maximum amount you can contribute to a Roth IRA for 2018 is $5,500, if you're younger than 50. Those age 50 and older can add an extra $1,000 per year in "catch-up" contributions. That is $6,500, which is the maximum contribution amount and the same as 2017.

The actual amount you can contribute to a Roth IRA is based on your income. To be eligible to contribute the maximum for 2018, your modified adjusted gross income (AGI) must be less than $120,000 if you’re single or $189,000 if you’re married and filing jointly. The contributions start to phase out above those amounts. You can't put any money into a Roth IRA once your income reaches $135,000 if single or $199,000, if married and filing jointly. Roth IRA income limits have increased slightly from 2017.

Unlike contributions to a traditional IRA—which may be tax-deductible—a Roth IRA has no up-front tax break. Money goes into the Roth after it’s been taxed. However, when you begin withdrawing funds in retirement, your contributions and all the earnings will be tax-free.

Roth’s are also more flexible than traditional, deductible IRAs. You can withdraw contributions to a Roth account anytime, tax- and penalty-free. However, if you want to withdraw earnings tax-free, you need to be at least age 59½ and must have owned the Roth for at least five years.

Roth’s aren’t subject to required minimum distributions (RMDs) after age 70½, and you can deposit money at any age, provided you have earned income from a job or self-employment. Traditional IRAs prohibit new contributions once you reach 70½, even if you’re working.

There’s no minimum age limit to open a Roth IRA, and you can contribute to another individual's Roth account as a gift. However, the recipients must have earned income, and you can only contribute an amount up to that person's annual earnings or $5,500, whichever is less.

Roth accounts are also a smart choice for those who want to leave money to their heirs. Heirs, other than a spouse, must take distributions from the IRA over time, but the money will be tax-free.

Not Creating a Comprehensive Plan. A major error most people make when creating a financial plan, is that their plan is too narrow. A sound financial plan is comprehensive in nature and covers all areas of your life, rather than only a single area like an investment portfolio. It should address tax issues, risk management, estate planning, and long-term care needs. These are all vital when creating a solid long-term financial plan.

Creating a Balanced Portfolio but Never Re-Balancing. Another frequent mistake people make is creating a balanced portfolio—and then not re-balancing it on a regular basis. You should maintain the portfolio balance, as the market ebbs and flows. The original portfolio can and will change over time, as events like market rallies naturally increase overall equity exposure, or retirees take required minimum IRA distributions that may cause an over- or underweight to equities.

No Follow-Through. The third mistake commonly committed by investors when creating a financial plan, is that they spend time creating their plan, but they don’t follow-through and act. You must implement your plan.

Of course, there are plenty of other investment miscues that people make. They try to out-think markets, sell off equities when markets sink, and think short term, rather than keeping the big picture in mind. A comprehensive plan is constantly evolving. It needs to be flexible to address changing needs.

Tax-Free Withdrawals. Unlike traditional IRA withdrawals, qualified Roth IRA withdrawals are federal-income-tax-free and most often state-income-tax-free. A qualified withdrawal is one taken after you, as the Roth account owner, have met both of the following requirements: (i) you’ve had at least one Roth IRA open for more than five years; and (ii) you’ve reached age 59½ or become disabled or dead. To satisfy the five-year requirement, the clock starts on the first day of the tax year for which you make your initial contribution to your first Roth account. That initial contribution can be a regular annual contribution or a conversion contribution.

RMD Exemption. Unlike a traditional IRA, you don’t have to start taking annual required minimum distributions (RMDs) from Roth accounts after reaching age 70½. Instead, you can leave your Roth account(s) untouched for as long as you live if you want. This makes your Roth IRA a great asset to leave to your family, if you don’t need the Roth money to help finance your retirement.

Annual Roth contributions make the most sense for those who think they’ll pay the same or higher tax rates during retirement. Higher future taxes can be avoided on Roth account earnings, because qualified Roth withdrawals are federal-income-tax-free (and typically not taxed at the state level). However, the downside is you don’t get a deduction for making Roth contributions.

Therefore, if you anticipate paying lower taxes in retirement, you might want to make deductible traditional IRA contributions (if your income allows). That’s because the current deductions may be worth more to you, than tax-free withdrawals down the road.

What is the other best-case scenario for annual Roth contributions? It is when you’ve maxed out on deductible retirement plan contributions. Annual contributions are limited, and earned income is required. The maximum you can contribute to a Roth for any tax year is the lesser of: (1) your earned income for the year; or (2) the annual contribution limit for the year. Earned income is wage and salary income (including bonuses), self-employment income, and alimony received that is included in your gross income (believe it or not). If you’re married, you can add your spouse’s earned income to the total. Remember, after reaching age 70½, you can still make annual Roth IRA contributions, provided there are no problems with the earned income limitation or the income-based phase-out rule. However, you can’t make any more contributions to traditional IRAs after you reach age 70½.

Roth conversions. The fastest way to get a significant sum into a Roth IRA is by converting a traditional IRA to a Roth. The conversion is treated as a taxable distribution from your traditional IRA, since you’re deemed to receive a payout from the traditional account. The money then is deposited into the new Roth. A conversion before year-end, will trigger a bigger income tax bill. However, today’s federal income tax rates might be the lowest you’ll ever see. Therefore, if you convert now, you’ll pay today’s low tax rates on the extra income from the conversion and avoid the potential for higher future rates on all the post-conversion income that’ll be earned in your Roth account. Roth withdrawals taken after age 59½ are federal income tax-free, provided you’ve had at least one Roth account open for over five years.

IRAs are distributed differently than other assets, during life and after death. Your IRA beneficiaries may qualify for special tax breaks that are often overlooked. They can’t change ownership during life or be jointly owned. IRAs pass by contract generally, and not by a will.

IRAs may require their own estate plans, and those plans should be integrated within the overall estate plan. You should speak with your estate planning attorney about this.

As far as taxes are concerned, IRA investment gains may not be subject to the 3.8% investment income surtax and may be subject to double tax at death–both income and possibly estate tax.

For example, if you were to inherit an IRA from your father when he passes away and he has a taxable estate, as the beneficiary you may be entitled to a special deduction that can offset some of the otherwise-taxable distributions from that IRA. This deduction is easy to miss because two entities must coordinate their tax planning: (1) the settling estate and (2) the IRA beneficiary. It’s not common for these two to make a coordinated effort to realize all of the tax-saving opportunities.

The distributions from an inherited IRA are generally fully taxable to the beneficiary. You might be able to find shelter from that tax liability, which would be easier to catch before the inherited IRA begins to pay income. However, even if you’ve started to get income, you may still be entitled to take this deduction.

When an IRA owner dies, there are a few complex rules from the IRS with which you’re expected to comply. The 691(c) deduction for Income in Respect of a Decedent may be worth discussing with your estate planning attorney, if you have inherited an IRA or think you may in the future. IRAs are very different when it comes to how they mesh with your existing plans and those of your heirs.

IRAs can be great, but they can also create many issues for you or your heirs. Work with an experienced attorney and keep more of your hard-earned cash for you and your beneficiaries.

401(k)s. A 401(k) allows employees to save and invest some of their paycheck pre-tax. Taxes aren’t owed until the money is withdrawn from the account. The annual contribution limit for 401(k)s in 2018 will go up to $18,500 from $18,000. This jump also applies to 403(b) and 457 plans, as well as the federal government's Thrift Savings Plan. If you’re 50 or older, remember that there’s also a catch-up contribution for 401(k)s that will stay at $6,000. That brings the maximum total contribution limit to $24,500 in 2018.

IRAs. An individual retirement account is an investing vehicle used by people to earn money for retirement savings. The limit for IRA contributions will remain at $5,500 in 2018, and the catch-up contribution for people 50 or older will remain at $1,000. If you turn 50 in 2018, you can make the full $6,500 contribution any time after January 1. There is no need to wait for your birthday.

Roth IRAs. A Roth IRA is a special retirement account to which you contribute post-tax income (you can’t deduct your contributions on your income taxes). Because the tax has been paid, future withdrawals that follow Roth IRA regulations are tax free. There’s no up-front tax deduction for Roth IRA contributions, as there is with a traditional IRA. The income limits to qualify to make Roth IRA contributions will increase a bit in 2018.

If you are filing taxes as a single or a head of household, the maximum amount can be contributed to a Roth IRA, if the modified adjusted gross income (MAGI) is less than $120,000. The contribution amount will phase out completely, once MAGI is greater than $135,000 (an increase from $118,000 to $133,000 in 2017).

For married couples filing jointly, the maximum amount can be contributed, if MAGI is less than $189,000, with the amount phasing out above $199,000 (an increase from $186,000 to $196,000 in 2017).

11/15/2017

“You can't give your required minimum distribution from a 401(k) to charity without triggering a tax, but you can donate your 401(k) RMD tax-free, if you roll the money over to an IRA.”

Required Minimum Distributions (RMDs) are minimum amounts that a retirement plan account owner is required to withdraw each year, beginning in the year that he or she reaches 70½ years of age or—if later—the year in which he or she retires.

However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs have to start once the account holder is age 70 ½—even if she’s not retired.

What about when a plan owner dies? What are the rules for distributions to their beneficiaries? There are different RMD rules that apply. The entire amount of the owner’s benefit usually must be distributed to the beneficiary who is an individual either:

Within five years of the owner’s death; or

Over the life of the beneficiary, starting no later than one year following the owner’s death.

Roth IRAs don’t require withdrawals, until after the owner’s death. The tax-free transfer of an RMD to charity only applies to IRAs. However, there’s a way to give money from your 401(k) to charity tax-free: you need to roll over money from your 401(k) to an IRA and then donate it to the charity.

To do this, you’d have to take your RMD from the 401(k) for this year, before you can do the rollover. You can then roll over 401(k) dollars to the IRA for future charitable transfers. If you do this by the end of the year, you'll be able to begin moving some of the money to charity in 2018, which may fulfill some or all of the RMD from your IRA.

If you're 70½ or older, you can donate up to $100,000 from your IRA directly to charity. The contribution counts towards your RMD and isn't included in your adjusted gross income (AGI), so that may make you eligible for tax breaks linked to your AGI and reduce or eliminate taxes on Social Security benefits.

11/02/2017

“Want to reduce your beneficiary's tax burden? Consider the estate planning power of a Roth IRA.”

There’s considerable talk about potential tax reform in Washington. It is anyone’s guess what that will look like in the end. However, taxes must be a significant concern for those who are doing estate planning in order to pass on their assets to their loved ones. Wise estate planning means you can avoid having a big part of the money you leave your heirs devoured by income taxes. It is a way to move that money to a nontaxable form.

Motley Fool’s recent article, entitled “A Clever Way to Cut Your Heirs' Income Taxes,” says the money you put into a Roth retirement savings account has already been taxed. It was taxed on the contributions you made or as a rollover from a tax-deferred retirement savings account. As a result, everything in that account is now non-taxable for income-tax purposes. So long as the Roth has been open for at least five years prior to your death, the money in that account is won’t be subject to federal income taxes.

In the event you leave the money in your Roth rather than spending it in your retirement, after your death the account will be transferred to the person you designated as a beneficiary. At that point, the Roth account will be subject to the IRS's rules for inherited IRAs.

The beneficiary must then begin to take distributions based on their predicted lifespan (pursuant to the IRS’s actuarial tables). If your beneficiary doesn't simply blow the money in the account right away, the balance in the Roth will continue to grow tax-free, providing them with some untaxed income in the future.

This estate planning strategy works, if you don't spend the money in the Roth account yourself. As a result, it's important to plan and find other sources of income to finance your retirement, leaving the Roth account for your heirs.

If you didn't set up a Roth account for yourself before you retired, don't worry, you can execute a Roth conversion at any age.

08/10/2017

“More beneficiaries who are considered high earners will be hit with steeper fees.”

Bad news for high-income retirees who were hit with premium surcharges for Medicare Part B and Part D: they may need to pay a bit more in 2018. The income thresholds for the highest surcharge tiers are going to drop next year, affecting more beneficiaries with higher premiums, says Kiplinger in its recent article, “Medicare Surcharge Thresholds to Drop.”

This recalibration of the trigger points was a part of the Medicare Access and CHIP Reauthorization Act of 2015, also called the "Doc Fix" law, which ended the annual battles over fee schedules for doctors' Medicare payments. To help pay for the permanent fix, lawmakers have asked high-income beneficiaries to foot the bill.

There’ll still be four surcharge tiers for 2018, and there’s no surcharge for beneficiaries whose modified adjusted gross income (MAGI: AGI plus tax-exempt interest) is less than $85,000 for single filers or $170,000 for married taxpayers filing jointly. However, the tops of the other tiers are going to be compressed. As a result, some income levels that were in tier two will move to tier three, and some beneficiaries previously in tier three will jump up to the most expensive tier four. The highest surcharges were previously triggered when MAGI passed $214,000 for singles and $428,000 for married couples. Now the trigger points will drop 25% in 2018, to $160,000 and $320,000 respectively.

Your 2016 tax returns are used to determine your 2018 Medicare premiums. Those returns have already been filed. Therefore, you could be stuck with higher premiums, unless you qualify for a waiver because of a life-changing event like retirement or the death of a spouse. But if you think your income will be at similar levels in 2017, you still have some time to try to lower your MAGI for this tax year to reduce your 2019 Medicare premiums.

If you might be on the border of a tier threshold, consider tapping into sources of income that are exempt from MAGI, such as Roth account distributions, health savings account distributions, loans from cash-value life insurance, a portion of nonqualified immediate annuity payouts and reverse mortgage proceeds.

If you are subject to required minimum distributions (RMDs) from retirement accounts, consider making a direct charitable contribution from your IRA, since this qualified charitable distribution won't count toward your MAGI.